How we found financial freedom

Building wealth on a middle-class salary doesn’t demand huge sacrifices. But it does require the courage to think for yourself.

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My wife Lily and I don’t consider ourselves big earners. We’re both salaried employees and together we make around $98,000 a year. Though this is more than the average Canadian household, it doesn’t seem to go far with a child to raise, excessive taxes to pay, and a 17-year-old car to maintain.

Nevertheless, in nine years we’ve built a net worth of over $600,000, paid off our house, and are completely debt free. Given our relatively young ages — Lily is 39, I’m 40 — we’re proud of what we’ve accomplished.

How did we do it? There was no magic formula. We worked hard, saved our pennies and stuffed our RRSPs. We made sacrifices. Early in our marriage I often worked 50 hours a week so I would have overtime pay to invest. So did Lily. It was tough, but now we’ve achieved many of our goals and are enjoying some of the rewards.

Lily and I both grew up in middle-class families. Her father worked in aircraft maintenance in Vancouver and her mother was a homemaker. I grew up in Oakville, Ont., where my father worked for the provincial ministry of health. My mother was a legal secretary. When I turned 19 I moved to downtown Toronto, but after five years I concluded that life was too short to keep enduring Toronto’s cold, wet winters and hot, humid summers. So I headed to British Columbia where I got a job as a machinist at a small business in the town of Maple Ridge, about 55 km east of Vancouver.

I met Lily at a housewarming party in the spring of 1997. We had a lot in common. We both had a strong work ethic, a love of the outdoors and a desire to have a family. We also agreed on another thing: we wanted to retire early. Two years later we married and gave ourselves five years to build a good financial footing for our future before having a family.

There was only one problem. Neither of us knew much about money. When I was small my father gave me an ounce of silver, which for a short time awakened my interest in finance. There was a phone number on the back that you could call to find out how much the silver piece was worth. I called every day to see if it had gone up. But as an adult, my knowledge of money consisted of having once bought a five-year GIC.

Even my brief experience with real estate didn’t qualify me as a future Donald Trump. A couple of months before I met Lily in 1997, a realtor friend and I got together and bought a townhouse for $200,000. We put 5% down and amortized the payments over 40 years. Yikes! A year and a half later when Lily and I became engaged, I suggested my friend sell his half of the house to Lily. He agreed, but it probably wasn’t the best investment she ever made. Thanks to our low down payment and lengthy amortization period, my friend and I had barely made a dent in the principal. The mortgage still stood at nearly $200,000.

To turn our dreams into reality, Lily and I knew we would have to educate ourselves about personal finance. We read everything we could about investing and financial planning. We paid attention to the business pages in the newspaper and watched how the markets behaved. We read David Chilton’s The Wealthy Barber and discovered the value of basic concepts such as “paying yourself first,” the “rule of 72” for figuring out how long it takes your money to double, dollar-cost averaging to minimize risk, and the advantage of a long-term horizon to save and invest.

Using our overtime pay at work, we maxed out our RRSP contributions in the first two years of our marriage. That resulted in tax refunds in the 40% range, which went to pay down our mortgage. But not all our investments were huge successes. One of the first things we bought together was a mutual fund. Our timing couldn’t have been worse. Ten days later the Asian currency devaluation fiasco hit. It was an early and abrupt lesson in market volatility.

Fortunately, investing was only part of our financial strategy. The most important thing we did was to make common sense choices on spending. We found that small things really do add up. I don’t think most people realize how true this is.

For example, Lily and I had shopped at two different grocery stores before we married. I was convinced my store was cheaper; Lily disagreed. So one day we spent an hour comparing prices of some common items. When we tallied up the numbers, we were stunned. On average, prices were an astounding 40% higher at one supermarket (Lily’s, not mine). Estimating an annual expenditure of $10,000 at the cheaper grocery store, we’re saving that extra 40% (or $4,000 per year) of after-tax income. Over 10 years, that one hour of comparison shopping has saved us $40,000.

Another example: when our 15-year-old refrigerator started acting up last year, I began researching Energy Star models online. A fridge is the single largest consumer of power in the house. Assuming we will have our next one for another 15 years, the extra cost for a high-efficiency model is trivial compared to the long-term savings, especially with hydro costs poised to skyrocket in the years ahead. The same applies to the compact fluorescent bulbs we filled our 3,100-sq.-ft. home with years ago. They cost a bit more but have paid for themselves over and over again. And, hey, they’re better for the environment.

Even the choice of where we live has paid enormous dividends. One of the reasons I bought my house is that it’s only 3 km from my job. Given my commute of only five minutes, nightmare rush-hour traffic reports on the radio mean absolutely nothing to me. Lily works only 15 km away. Living that close allowed us to purchase a 50-cc Yamaha scooter instead of a second car eight years ago. Thanks to the mild British Columbia winters, we can ride to work at least 48 weeks of the year. I take the scooter in the morning and Lily, who works evenings as an accounting clerk at a tire company, takes it when I get home. The savings in fuel are obvious and the savings in insurance really add up as well. As with our choice of grocery stores, the accumulation of small advantages becomes evident when measured over several years. I estimate that our decision to drive a scooter instead of a second car has saved us more than $10,000. Yet I’m still amazed how long it’s taken scooters to catch on. After we bought ours, and saw how much money we were saving, I was convinced everyone would get one. But it’s only been in the last year–after gas hit $1.50 a litre–that I’ve seen more scooters on the road.

Once we put our minds to money, it was encouraging to see how quickly we made progress. Within a couple of years of being married, our mortgage started to shrink. Another couple of years passed and we were surprised when our RRSP mutual fund portfolio reached $100,000. We had planned to wait five years before having a child and we were right on track. Our beautiful, bright daughter Samantha was born in 2003. She’s now five and a half and we’re already teaching her about money and saving. She has her own bank account and no less than five different piggy banks. She helps sort coins and takes them to the bank where she signs her own deposit slips.

If there’s one book that has shaped the way we think, it’s Your Money or Your Life by Joe Dominguez and Vicki Robin. Lily and I felt like we’d been slapped in the face when we read it. There’s one line in that book that asks you to calculate how much money you’ve earned in your life. Then it asks: “What do you have to show for it?” I thought “wow!” That really put everything into perspective.

One lesson we learned from Your Money or Your Life is to resist impulse buying. If you think you want something, go home and sleep on it. Chances are, the next day you will no longer want it.

We believe that we’ve already achieved financial freedom — that is, if you define freedom as not being beholden to anyone, especially creditors. We’re aware that society tempts us with easy credit. But mortgaging our future through “buy now, pay later” arrangements has never made sense to us. We find much greater satisfaction in our free time together as a family, and we look forward to the freedom we’ll have in retirement.

To help us get there, we resist the onslaught of advertising. We find that we really don’t need a new car. Our 1991 Acura Legendwith 280,000 km is running fine, thank you. We can do without a home theatre system. Our 16-year-old Sony TV is OK. We dine out infrequently, because we can eat better, healthier meals at home. Our two credit card balances are paid in full every month. And we annually update our household cash flow chart to reflect any changes in incomes and expenditures. It’s basic arithmetic, after all.

We don’t feel as if we’re doing without. Sure, there have been many times over the years when we’ve been tempted to spend rather than save, to holiday in a place more exotic or to impulsively splurge on some big-ticket item. Frankly, that would be the easy thing to do. But exercising a small degree of financial discipline now puts us on a path that we know will lead to a better tomorrow. The future, of course, will always hold a degree of uncertainty. But with distractions like inflation or the rising costs of health care and education for our daughter as we get older, who needs the added stress of not having saved enough for themselves?

We’re getting closer to our goal of early retirement with each passing day. We’re not working those crazy overtime hours anymore and we are able to spend more time together as a family. Photography has become a passion of mine and our daughter is involved in activities such as tap dance and gymnastics. This summer we even took her to Disneyland in California. I’ve “cured” myself of checking the value of my mutual funds every day and a year ago we reached another big milestone: we paid off our mortgage.

Our daughter has a good foundation built in her RESP, we’re rebuilding our emergency fund to a level adequate for three- to six-months living expenses, and we’re saving for a second, economical car. Our combined RRSPs are worth over $150,000, and now that we’re mortgage-free we have the choice to do as we please with the $500 a week we were paying to our lender. We’re looking at taking advantage of the new tax-free savings accounts (TFSAs) beginning next year, topping up our RRSPs again or….who knows? Having earned our financial freedom, the choice is ours.

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